Purse Ho
This is the time of year when farm businesses make the decision to change their structure for a January 1 start date.
If this is something you are planning to do, it would be beneficial to talk to your team about it. It’s easier to start off on the right foot than to correct mistakes after the fact.
Suzy Martin, farm management specialist at the Ohio Valley Farm Business Analysis Association, has prepared the following article for you to read before making any changes.
There are several reasons why a farming business can split into multiple entities. This can be for transitional and inheritance purposes, for liability reasons, for tax matters, etc. Ideally, these types of decisions involve the contribution of all those who are part of the “team”.
That is, owners, lawyer, tax advisor, management, lender, heirs, etc. Basically, anyone who might be affected by such decisions.
If an operation is part of a program like Kentucky Farm Business Management, not only can they be made aware of the pros and cons of multi-entity structures, but they can also be made aware of the importance of keeping up with the changes brought about by the new structures. business.
In other words, if a company decides to create these entities, it must also be willing to “point i’s and cross t’s” to ensure that the reasons for these are not invalidated.
For example, suppose a farm operation creates a new entity for semi-trailers and grain trailers. The aim is to limit liability in the event of an accident.
This is all well and good, but to get the limited liability you seek, the business has to operate as a completely separate business. This means that all insurance, loans, securities, etc. must be in the name of the trucking company.
All drivers must be company employees and are paid for the hours spent on trucking. If you have employees who truck and farm, you might even have to pay them from different companies based on the work they’ve done.
A trucking business would not qualify for the farm exemption, so all wages paid to employees through the business are subject to unemployment tax. Non-farm businesses complete a quarterly Form 941 to report federal payroll taxes compared to an annual Form 943.
Workers’ compensation insurance should also be taken out. The trucking company should charge the farm a fair and reasonable rate for moving grain by truck. The operation should ensure that they do not mix up expenses between companies.
Another common example is having the land in one entity and the farm business in another. Again, they must operate as completely separate businesses.
Land improvements, property taxes, land loan payments, etc. must be paid by the land company.
In addition, the acts must have the appropriate verbiage to match. The farm business will have to pay fair and reasonable rent to the land company.
This would also include any buildings on the property, as these are typically real estate. The Farm Service Agency (FSA) should be aware of the configuration of its records.
There are other accounting issues in multi-entity operations. One is the transfer of money between entities. When money is transferred, the income or expense account used should reflect the account that was used in the corresponding entity.
Continuing the example above, if the farming entity pays rent to the entity that owns the land, the transaction would be recorded as rental expense in the first and rental income in the second. If businesses are simply transferring money between accounts, then both entities will need to place the transaction in a tax-free account.
The bottom line is if you can’t call an item an expense in one business without reporting it as income in the other. All entities should have their own set of records and their own checking account. Finally, the entity that guarantees the loan must be the entity that makes the repayments of the loan.
Events to comeFinishing nutrition for beef cattle, 6 p.m. to 8 p.m. on December 13 at Meyer Creek Park-Calhoun.
Seed treatment training, 10 a.m. to noon. December 9. Open to everyone. Provides two specific hours for Certified Commercial Applicators for Categories 1A, 4 and 10.
The BARN (Bringing Awareness Right Now) Dinner Theater, 6:30 p.m. to 9:00 p.m. on December 15 at the RiverPark Center.
The Annual Farm Lender Conference, 9 a.m. to noon on December 15 at the Henderson County Co-operative Extension Office.
Clint Hardy is the Agricultural Extension Officer with the Daviess County Extension Office. He can be reached at 270-685-8480.
Clint Hardy is the Agricultural Extension Officer with the Daviess County Extension Office. He can be reached at 270-685-8480.